According to a press release published on Tuesday, the State Bank of Pakistan (SBP) has decided to increase the policy rate by 100 basis points to 21%.
Following a meeting of the bank’s Monetary Policy Committee (MPC), the announcement was made.
“The MPC noted that inflation in March 2023 rose further to 35.4pc, and is expected to remain high in the near term. However, there are early indications of inflation expectations plateauing, albeit at an elevated level,” a press release issued by the central bank said.
1/4 Monetary Policy Committee decided to increase policy rate by 100bps to 21% in its meeting today.https://t.co/JeUhdtDFrq pic.twitter.com/6avIFg4S6c
— SBP (@StateBank_Pak) April 4, 2023
The press release said that the MPC viewed today’s decision as an “important step towards anchoring inflation expectations around the medium-term target, which is critical for achieving the objective of price stability”.
The committee further observed that Pakistan’s financial sector “remains broadly resilient, while economic activity continues to moderate”.
Factors Identified in Policy Rate that will Impact Macroeconomic Outlook
The committee had identified three crucial factors that had an impact on the macroeconomic outlook, according to the press release.
“First, the current account deficit has narrowed considerably, more than previously anticipated, mainly on the back of sizable import containment. Nonetheless, the overall balance of payments position continues to remain under stress, with foreign exchange reserves still at low levels,” the press release said.
“Second, significant progress has been made towards completion of the ninth review under the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) program.
“Third, recent strains in the global banking system have led to further tightening of global liquidity and financial conditions. These have added to the difficulties of the emerging market economies like Pakistan to access international capital markets,” the statement said.
The MPC deemed the present monetary policy stance “appropriate” as a result, according to the central bank, which also emphasized that the move, together with earlier monetary tightening, would help reach the medium-term inflation target over the next eight quarters.
“However, the committee noted that uncertainties attached with the global financial conditions as well as the domestic political situation, pose risks to this assessment,” the statement said.
The MPC also noted that the current account deficit in February was only $74 million, and that the cumulative deficit for Jul-Feb FY23 is currently $3.9 billion, or roughly 68 percent less than it was during the same time previous year.
According to the press release, “this mainly reflects the contraction in imports, which continues to outweigh the combined decline in remittances and exports.”
It also noted that worker remittances had marginally increased month over month in February and that the trend was anticipated to continue.
“However, despite the lower current account deficit, higher loan repayments relative to disbursements are keeping the foreign exchange reserves under pressure.
Thus, the committee reemphasized that the early conclusion of the ninth review under the IMF program is critical to rebuild the FX reserve buffers.”
To read our blog on “SBP reserves record significant drop owing to repayment of foreign debt,” click here.
